Which bond provision would be considered the most risky for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?
A) Sinking fund
B) Deferred call
C) Freely callable
D) Non-callable
E) None of the above

Question

Quizplus · Accepted Answer

A freely callable bond allows the issuer to call the bond at any time without penalty, meaning that if market interest rates drop, the issuer can refinance the bond at a lower rate and retire the higher-yielding bond. This leaves the investor with reinvestment risk, as they would have to find a new investment in a lower interest rate environment. Therefore, a freely callable bond is the most risky for an investor concerned about interest rate drops.

Which Bond Provision Would Be Considered the Most Risky for an Investor